I am Chairman and CIO of Gramercy Capital Mgt. Corp., a NY registered investment advisor, which I founded in 1986. Gramercy has been ranked #1 in the Nelson's Directory of Registered Investment Advisors. I hold a B.A. in history from the University of Wisconsin, Madison and was awarded a Ford Foundation Fellowship. I earned an M.B.A. in financial accounting from the NYU Graduate School of Business and am also a CFA (Chartered Financial Analyst). I spent 15 years as a media and leisure analyst before I began managing OPM (other people's money) in 1980 at Manufacturers Hanover Trust where I oversaw their $250 million "mid-cap" fund. I have been the subject of feature stories in many publications such as The Wall Street Journal Business Week, Newsweek , and USA Today. I have appeared often as a guest on financial programs on CNBC, Bloomberg, PBS and Fox Business. I have been contributing to Forbes.com since 2006 so you can see my track record of commentary.

Groupon, Down 40% In 2014, Finally Does Something For Shareholders

Today trading below $7, GrouponGroupon is down about 40% so far year to date. Management is still groping for a way to reinvent itself when, as predicted, the daily deal business turned out to not be a viable long term strategy. It was too easily copied by everybody from the local newspaper and TV station to Amazon, everyone’s most formidable competitor.

Mind you, even the smart people at GoogleGoogle were bamboozled by the Groupon flash in the pan concept. In 2010, (seems like an eternity ago), Groupon received a $6 billion offer; $5.3 billion upfront and a $700 million additional earn out from GOOG. Groupon turned it down. The offer wasn’t clever and neither was Groupon in turning it down.

The company chose instead to go public. In the early half of 2010, talk was that GRPN would IPO at valuations between $25 and $30 billion. But that was then and even later that year, the bloom was coming off the rose. At it’s IPO price of $20 per share, Groupon was valued at approximately $13 billion. The stock rose briefly the first day of trading to $31 and it was downhill from there to a low of $2.69. Now below $7, the company is valued at a third of that Initial Public Offering price of $20 or more like $4.5 billion. In a way, one can wonder how today anybody thinks it is worth even that.

Management has admitted that they must look elsewhere for growth and for income than the Daily Deals business model and has turned to discount retailing. So far, it has been able to generate sales selling discount products but it hasn’t been able to turn a profit doing it, certainly not using GAAP accounting methods.

groupon (Photo credit: Sean MacEntee)

A decade ago, Chief Operating Officer.Mr. Raman was CEO of Drugstore.com. In that post for over three years, Raman grew revenues by 70% but as losses mounted, he left abruptly. At that time, Jeff Bezos’ Amazon owned 16.5% of Drugstore.com and Bezos himself sat on its Board of Directors. Not long later, Raman showed up at Amazon as SVP of Global Hardlines. Drugstore.com struggled along under its next CEO Dawn Lepore until it was finally put out of its misery and sold to Walgreens for $3.80 a share. At its peak under Raman’s reign, the stock sold for more than $9 a share. He may do well for himself but it is less certain that he creates value for shareholders.

Months before Raman left it in November 2003, Drugstore.com purchased an online seller of contact lenses called International Vision Direct for 6.8 million shares of DSCM plus $10 million in cash for a total value of $48.8 million. Raman departed fairly abruptly in July. Not long later, on November 10, 2004, Drugstore.com wrote off half the value of the Vision Direct acquisition price in an impairment charge in its third quarter report.

Now Mr. Raman is the COO of Groupon and once again he is rapidly growing sales but not producing profits. Mr. Raman has a great biography of growing up dirt poor in a tiny village in India and making his way through engineering school there. He clearly is intelligent and must have a charming way to move in the circles in which he now does and work his Board connections for his next job.

However, there is a clearly repeating pattern here. Generating sales doesn’t seem to be that hard for Raman. But, producing profits, the name of the investing game, seems to elude him. As before, Mr. Raman and CEO Eric Lefkofsky are pointing to the acquisitions they are making now as their path to future success. We need to hope that whatever they are buying is better than the companies Groupon bought in Europe that weren’t worth the price paid or the Drugstore purchase a decade ago of Vision Direct.

The short sellers have had a field day with this stock so far this year. Earnings will be out on May 6th. Many have been covering lately and booking their profits on the stock’s collapse to date before the results are announced. There is still a sizeable short position which could provide support to the stock if something is announced that is better than the news management led investors to expect for this quarter on its first quarter conference call.

On May 1, 2014, Groupon announced that it was going to begin selling bulk quantities of more than 100 items you might buy now at the drug store or grocery, or maybe at Amazon, Wal-Mart or Walgreens. It is hard to believe that little Groupon can compete on price with any of those purveyors of routine goods or that you can turn a big profit doing it. If you consider the thousands of sku’s in a drug store, it is hard to think that it is very efficient for the shopper to look at the 100 items they intend to carry for bulk purchase. The intention is to cherry pick the items on offer with good discounts for quantity purchasers. Among those items to be offered in bulk are razor blades.

This has been a year in which, on balance, stocks are flat and owning this one has been a bloody business.

Joan E. Lappin CFA Gramercy Capital Mgt. Corp.

Neither Mrs. Lappin, Gramercy Capital, nor its clients own any shares mentioned in this article. To follow Mrs. Lappin on Forbes click on the button at the top of this column. To follow her on Twitter: @joanlappin. For information about our firm: info@gramercycapital.com

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